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Swiss-based mega bank UBS, updated its Global Real Estate Bubble Index. The index, looks for cities that experience price climbs that disconnect from fundamentals. Topping the list this year is Toronto, and in fourth place is Vancouver. Let’s take a look at the bubble factors they’re observing.

Global Prices Are Elevated

UBS analysts note prices are elevated beyond logic in many global cities, with Canada nabbing two of the top spots. The firm attributes a combination of low interest rates and foreign capital, meeting up with a local “fear of missing out.” Yes, one of the world’s largest banks basically just said local FOMO is being taken advantage of by foreign capital flows. Probably not a new concept if you’re a regular reader, but it’s nice to see we’re all on the same page here.

UBS Global Real Estate Bubble Index Chart.

Toronto

Topping the list this year is Toronto, which the bank believes is the most at risk market in the world. Analysts noted price growth reached an “excessive 20% year on year in the last quarter.” Inflation adjusted, prices have doubled in the past 13 years. Rents have only increased by 5%, and incomes less than 10%. The firm believes either a stronger Canadian dollar, or another interest rate hike, would send the market spiraling lower.

Vancouver

Vancouver is the only other Canadian city to make the list, and is fourth highest risk of being in a bubble. Analysts from the firm note that prices are up 25% year on year, when inflation adjusted. Incomes and rental prices are only up 3% and 5% respectively. Analysts don’t believe it’s as inflated as Toronto, but does note the market has “substantial downside and elevated correction risk.”

Bubbles aren’t necessarily scary, and sometimes they can just be a lull in the market while incomes catch up. Although some people argue that’s impossible. The report does warn that investors in these “wildly overvalued markets should at least not expect real price appreciation in the medium to long run.” Basically, they’re calling a top on price growth. How Toronto and Vancouver real estate responds to this is up to the local markets.

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I do find it humorous that Canadians keep pointing to China’s problems, not realizing that the environment is very different. Personal debt is in China is high, yes. However, it’s only a fraction of the massive GDP. Canada’s GDP is now dwarfed by personal debt. China’s economy is acting like a developed country, and Canada is acting like an emerging market.

The concentration of resources/capital/investment/development/people/agriculture/industry in a small section of southern Ontario is unparalleled. No where in the world has such a strange mix which, for better or worse, will never change. The only industries that are able to remove themselves from this ‘supply chain’ are ones that require cheap space (i.e. unique manufacturing) or access to resources (i.e. mining, aggregates, agriculture) and even then, if you go too far from the hub your costs go in more than just monetary metrics. By your logic, provinces like Manitoba and Saskatchewan should be bursting at the seams with industry, and the people they employ, buying up swathes of cheap land. This is clearly not the case.

FULL DISCLOSURE: I am not an agent and have owned in Toronto for 5 years. Looking to go to a more rural location so I’m not a TO nut hugger.

[…] follows the US Federal Reserve, which refers to Canadian property buyers as "exuberant", UBS ranks Toronto as the largest bubble in the world and IMF expresses concern to senate . It is probably […]

Agree, real estate recessions are a good thing (unless you are trying to sell in the middle of one). Like many people who have a chunk of net worth tied up in a mortgage free Vancouver house, I need one more bubble before I retire in about 8 years. Best to have the market crater now, and sell during the next up cycle. I’m not talking about savant like timing. It’s pure dumbass luck ( and some aforementioned fiscal conservatism). In the US, economists are leaning towards a housing demand downturn as early as late 2019, and as late as late 2020. Canada ? Happening now at the high end, trickling down.